Despite the FMCO, BAT’s 9MFY21 results beat our expectations, accounting for 85% of our estimate. We believe the positive bump came from the stringent measures in place to combat the illicit tobacco trade. With the reopening of the economy, we expect 4QFY21 to continue to be stellar; thus, we raised our FY21E/FY22E earnings by +10%/+7%. TP is also raised to RM16.70 based on unchanged FY22E PER of 17x. Undervalued at this juncture with an attractive dividend yield (>6%), we reiterate our OUTPERFORM call on the stock.

Above expectations. 9MFY21 PATAMI of RM213m came in above/within of our/market estimates at 85%/77% respectively. 3QFY21 sales momentum continued despite the FMCO. The 26.0 dividend per share declared for the quarter also exceeded expectation, bringing dividend declared to date to 71.0 sen (vs. our full-year expectation of 86.0 sen).

Improvement despite the challenges. YoY, top-line saw a 7% improvement with BAT’s domestic volume growing at +8% to 2.5b sticks as black market share of the tobacco market declined by 6ppt to 58%. BAT’s domestic volume growth outpaced the total legal industry by 1ppt (+7%) with market share improving by 1% to 52%. Volume growth was aided by illicit backflow – 401m sticks (mns) mitigated by impact of Covid impact and FMCO at 331mns. All segments saw growth; (i) Dunhill (+2.1%), (ii) Peter Stuyvesant and Pall Mall (+0.8%), and (iii) Rothmans and KYO (+2.5%). While GP margins remained stable at 26%, EBIT margin saw a significant improvement (+2.4ppt) to 17% attributed by declining opex (-16%) attributed to lower overheads and absence of restructuring costs incurred in 1HFY20. With an unchanged ETR, PATAMI saw a 26% improvement to RM213m.

QoQ, top-line continued its positive momentum albeit moderately at 3% to RM613m (or -2% YoY given the FMCO). Domestic volume saw a +1ppt improvement with driven Dunhill and continued to hold the market leadership position with share of premium segment of 61%. The Group’s Value-for-Money (VFM) brands Rothmans and KYO recorded an increase of 0.3ppt capturing 10% share of market. BAT’s share of the market remained stable at 53% (+0.2%). While GP margin up by 1ppt from the preceding quarter, EBIT remained stable at 18% on account of higher opex (+26%). PATAMI saw a 10% improvement as ETR fell 6ppt to 24%.

Looking positive ahead. As we reiterated previously, 2HFY21 looks like a positive one for BAT, given the gradual reopening of the economy with industry volumes gaining traction on stringent measures introduced in Budget 2021 to curb rampant contraband cigarettes. Moving forward, we reiterate our view that growth will be sustainable ahead given its introduction of less risky products to consumers, products’ household name and strengthening of its VFM (Value-for-Money) segment. In view of the significant potential tax revenue for the government, we believe these stringent measures in combating contraband will continue (if not expand) ahead reinforcing sales, especially in the economy reopening phase.

Post results, we revised our FY21E/FY22E by +10%/+7% on account easing of movement restrictions and further improvements in combating the illicit tobacco trade. Our DPS is also raised by 5.0 sen to 91.0 sen/92.0 sen.

Reiterate OUTPERFORM. As earnings are revised upwards, we raised our TP of RM16.70 (RM15.70 previously) applying an unchanged (FY22E PER of 17x – closed to its 3-year Mean). Given its potential tax contribution to government coffers, enforcement in curbing illicit products looks likely to be strengthened coupled with the momentum of economic recovery which would boost sales. Its dividend yield is among the highest in our consumer universe at 2x higher than the peers’ average. Undervalued at this juncture with a compelling dividend yield of >6% we reiterate OUTPERFORM.

Source: Kenanga Research - 29 Oct 2021